One chart says it all. This is the ARGENT 4.125% 2035 benchmark sovereign bond, denominated in USD, trading at around 54 cents on the dollar (up 5 pts. this morning).
Old hands from the emerging market bond trenches will recognize the price waterfall. Plus ça change, plus c’est la même.
In November of 2023, a libertarian Austrian economist by the name of Javier Milei won the Argentine presidency by promising to bring financial discipline and economic stability to the world’s biggest serial defaulter.
Milei did the politically impossible and delivered a 5% fiscal adjustment of 5% GDP while maintaining a 50% approval rating.
The inflation that begin to rise under his predecessor was successfully shot in the head.
Core CPI was at 170% YoY at the time of Melei’s election in November 2023 and peaked at 300% four months later.
Currently at 36% YoY.
A political economy defined by a long legacy of populist policies, known as Peronismo, created a chronic public over-spender supported by a dysfunctional private sector.
Thus, Milei’s public fiscal adjustment is at the root of the disinflationary impulse, supported by private sector reforms.
Milei’s fiscal strategy has achieved a surplus for the first time in fifteen years.
In a normal world, this would be good news. The problem is, Argentina does not live in a normal world.
The country is saddled with $429 billion in U.S. denominated debt which it has chosen to service instead of repudiate as Argentina is seeking to regain access to global funding markets.
Argentina does not operate on a free-floating foreign exchange regime, which is the traditional balance of payment adjustment mechanism.
Thus, part of Argentina’s disinflationary impulse is synthetically and artificially borrowed from its over-valued currency.